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The $360 Billion Waiting on an Australian Inquiry

(Bloomberg) -- Australian investors just got the final piece of a 13-month inquiry into the rampant misconduct at the nation’s biggest banks and financial firms that could set the tone for the country’s stocks this week.

The report on financial companies -- which make up the biggest portion of the benchmark equity index -- was released after the stock market closed Monday and recommended against a structural separation. The S&P/ASX 200 Finance Index, whose companies account for a little more than A$503 billion ($364 billion) in value, hangs in the balance as investors assess the report just released which referred 24 misconduct cases to regulators.

In 76 recommendations, Commissioner Kenneth Hayne recommends tougher regulation, more scrutiny of pay and culture and urges the securities regulator to consider court action as a first option. But in a win for the banks, he stops short of calling for them to be forcibly broken up to stop them offering financial advice and wealth management.

Read more on the final report in our live blog here

Financial stocks have languished about 14 percent since the Commission was established, as the four biggest banks have lost over A$60 billion in market value. The sector was the second-worst performing on the S&P/ASX 200 Index last year. And the financials sub-gauge has eked out a mere 0.7 percent gain this year, while the benchmark index has climbed more than 4 percent.

It’s no wonder Australia investors are nervous. Bank earnings could be dented by increased compliance, customer-compensation costs and recommendations for lower fees, with the impact possibly flowing on to the broader economy.

In fact, options traders have been preparing for an increase in stock swings at the nation’s lenders. Implied volatility for Commonwealth Bank of Australia (which is also scheduled to release earnings this week), National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. has increased to its highest level since at least April against their actual stock moves. For Westpac Banking Corp., the spread between implied and realized volatility is at one of its highest readings over the past year.

Here’s a refresher on the string of scandals:

Wealth manager AMP Ltd. said it repeatedly misled the regulator over charging customers fees for services they didn’t receive, prompting its top executives to resign and its stock to plunge 58 percent in 13 months.

CBA admitted to more than 53,000 money-laundering law breaches that allowed drug syndicates to funnel millions of dollars offshore. It agreed to pay the biggest civil penalty in Australian corporate history, A$700 million.

Australian prosecutors charged the former local heads of Citigroup Inc. and Deutsche Bank AG with criminal cartel offenses following a A$2.5 billion share sale by Australia & New Zealand Banking in 2015.

National Australia Bank employees accepted cash bribes to facilitate mortgages they knew were based on false documentation in order to “smash” sales targets.

Australia stocks broadly rose on Monday amid positive momentum in Asia as strong economic data from the U.S. and positive comments on the U.S.-China trade talks buoyed investor sentiment. Elsewhere in the region, traders are preparing for the Lunar New Year holidays, which will see the China, Taiwan and Vietnam markets closed for the entire week, while Hong Kong is on a half-day Monday and will be closed Tuesday to Thursday. Click here for the full list of stock market closures this week.